Writing and Waiving off Loans

Writing and Waiving off Loans

By Dr. Lalit Kumar Setia |  @drlalitsetia  |  drlalitsetia@gmail.com 

The developing nations are affected from the concern of low economic growth and most of such nations are suffering from the 'political interventions for subsidizing products and services to the poor'. The public sector enterprises (PSEs) in which the Government hold more than 51% stake, are bound to implement the recommendations of the Government in delivering products and services. The recent concern of 'low profitability of Bharat Sanchar Nigam Limited (BSNL) in India' is also result of such intervention and recommendations. However, in India, the Government has started to move from Government to Governance and continuously taking big steps to cut the subsidies and offering of products and services at lower rates. The Government adopted the path of disinvestment in Public Sector Enterprises.
The Deputy Governor of Reserve Bank of India (RBI) suggested Government to rationalize the schemes and development programmes of education, health, and infrastructure sectors by cutting subsidies. He also suggested to reduce the borrowings by divesting more in public sector enterprise shares and giving bigger room for private players to come ahead for improving efficiency levels in the enterprises**. He also put emphasis upon undertaking more reforms in land, labour, and agricultural sector for promoting private sector.

Central Banks in Economic Growth:

The central banks of all countries around the world, supervise the economic position of their economies. In order to ensure sustainable development, the banks also approach international financial institutions like World Bank, Asian Development Bank, NABARD etc. In September, 2019; the Asian Development Bank (ADB) decided to give $5 Billion to Bangladesh for 2020-2022 aiming to further strengthen the inclusive and sustainable growth in the country. The ADB provided financial assistance on the basis of new Country's Operations Business Plan (COBP) as it contained infrastructure development plans. The Reserve Bank of India (RBI) provided financial assistance to Government of India for infrastructure development of the country. The assistance provided for infrastructure development are fair and normally not questioned by any economist. But providing financial assistance in form of loans to farmers for agriculture, irrigation, or other purposes and then waiving off the loans; is always questioned by the economists.
During April 2014 to April 2018, the public sector banks of the India, written off an amount of Rs. 3,16, 500 crores of their loans standing as Non-Performing Assets (NPAs) in their balance sheets. However, it is a regular practice of banks to write off the NPAs, but after the scam disclosed of Nirav Modi, the writing off NPAs becomes in the light of media and people. Why banks are writing off loans and how waiving off loans is not affecting the financial health of banks? What are the initiatives to make banks getting rid of problem of Non Performing Assets? [Read More]

Why to write off a loan?

The writing off loan is treated as loss and it reduces the net profit of the bank. The reduction is net profit further reduces the tax liability of the bank. Even after writing off the NPAs, its borrowers are liable to pay the amount of loan to the banks. In order to recover the amount of loans, the banks adopt various tools of recovery. However, before considering a loan as NPA it is seen that such loans had very less probability to have recovery of the amount.

Why the demand of loan waiver for farmers is not justified?

Recently after the increase in the amount of NPAs in banking industry, the people start demanding loan waiver for the agricultural loans. The Government is not considering this demand just due to large number of NPAs in banking industry. Because the loan waiver is quite different from the writing off loans. While writing off loans the amount is still remained due and tools of recovery are used to recover the amount of loan from the creditors. In case of loan waiver, the recovery of such loans which are waived off, is cancelled. Banks have to give up the loans waived off completely and no recovery can be made in such loans. The loan waiver is justified sometimes when the farmers lost their entire income due to natural calamities like poor monsoon, floods, and drought. Such conditions are not in the control of farmers and keeping in view, their weak position to return the amount of loan, the government took decision to waive off their loans. But due to such waiving off of loans, the farmers through their representations, try to get their loans waived off even if they are capable to return the amount of loans.

How writing off and waiving off loans are critical problems for banks?

Both the writing off and waiving off loans are problems for the banks because such practices harm the profitability of the banks. Whenever any loan is provided to a commercial or industrial firm which went into loss and become incapable of returning the loan, the loan becomes Non Performing Asset and required to be written off. On the other hand, whenever the loans are given to farmers and due to their weak financial position, the government waived off their loans; also reduced the profits of the banks.

How banks can get rid of such NPAs?

(i)               Reducing pressure for accomplishing targets in providing credit:

At the time of providing loans, there is pressure on banking customers to increase the number of loan amounts and each is provided with targets to be achieved. Due to such pressures, the banking employees try to pass the loans of the customers even if they donot have capacity to return the amount of loans. It is must to enforce the policy for fixing accountability of the employees in case of loans amount is not returned by the customers.

(ii)             Empowering banks to recover amount before insolvency:

Secondly, the banks should constantly monitor the financial position of each creditor so that at the time it seems that the person who took the loan is not performing well, the amount of loan can be recovered early by tools of recovery in the hands of banks. The government should empower and support the banks to function freely with recovering the amount from the defaulters with strictness. The Enforcement Directorate not only recovered amount from the Jewellery and bank accounts of the Nirav Modi but also attached his assets to recover maximum amount of defaulted money. The Enforcement Directorate is able to make recovery because of support of the government.

(iii)          Improving level of governance in Banking Sector:

Thirdly, the banks are motivated to lend more and more money for some specific purposes relating to social welfare and schemes launched by Government. The banks also tried to manipulate the records to show and express that they have been continuously supporting government in fulfilling the provided work. For example, the financial inclusion through Jan Dhan Accounts led to opening of such accounts at war level and the banking staff started to open the accounts as much accounts as possible. The Jan Dhan Accounts further led to credit facilities to the poor people who may not be able to return the loan amounts. Such particular schemes also create the problems and led to NPAs. The banks are not provided any reward for keeping their accounts accurate and present a fair picture. It is required to offer the incentives for ensuring transparency in the banking records.  

(iv)           Overcoming Practical Problems of Banking Sector:

The research studies specifically carried on banking reforms suggest that the banking sector is suffering from various practical problems and it is required to bring systematic solutions. The role of investigative agencies is also under threat as the audit of banking companies is not revealing the irregularities and embezzlement. The government’s role and the functions of RBI to sort out the problems of banking sector; became challenging and banking reforms are required to improve the whole situation. The insolvency code can be further strengthened to reduce the chances of its misuse. 

*Copyright © 2019 Dr. Lalit Kumar.

**This information has been retrieved from "Govt. must reduce borrowing by divesting stake in PSEs: Acharya" published on Pg. 15 of The Hindu on 23rd July, 2019.

Restricting Demand of Products to contain Inflation

Restricting Demand of Products to contain Inflation

By Dr. Lalit Kumar Setia |  @drlalitsetia  |  drlalitsetia@gmail.com  |  November 13, 2018 9:30 a.m.

The control over inflation by restricting demand of goods and services, in itself is an intervention of central bank which affects adversely in long run. Let’s take an example, suppose the government imposes more taxes in form of Goods and Services Tax or other indirect taxes; definitely it will reduce the inflation and also fill the basket of the government with a lot of revenue but at the same time, due to higher cost being afforded by the consumers, the overall demand of the goods and services will be reduced which will give indication to the suppliers to produce less and employment opportunities will reduce significantly.

What can be done for long-term appreciation in value of a currency?

The real secret of appreciating the currency is to provide a friendly environment to the farmers, manufacturers, producers, and service providers by reducing the taxes, appreciating their efforts both in monetary and non-monetary incentives, attracting foreigners particularly the innovators to come and live in country, and providing sufficient autonomy to grow the businesses. The reservation in employment and education, the subsidies to poor people, and benefits to a particular category of people also affect the economy in negative sense because in order to get such benefits or in order to stay with such benefits, the people become less productive which ultimately harm the progress of nation. The high cost of living, high cost of setup business plays a great role in discouraging the talented people for staying in the country. A large number of Indians are being employed in rich countries and making them richer due to high cost of living and high cost of setting up businesses in India.

What does rising rate of Non Performing Assets indicate?

The Non Performing Assets of the banking sector are the result of non-availability of friendly business environment and the rise in NPAs during last one decade also indicates how India is going down and down in production, manufacturing and providing services at reasonable cost. Higher the cost of business, high the rate of NPAs will be. Instead of focusing upon making rules strict, it is more important to focus upon providing credit facilities at less rate of interest.

Why Indian Rupee is depreciated in last few years?

The value of dollar in terms of rupees in the year 2008 was only Rs. 39.42 while it is now almost near to Rs. 75 just in last one decade. Instead of too much Foreign Direct Investment (FDI), the India lost the value of currency because the Indians have become addicted to spend more money on products and services being provided by the foreign companies. The Multinational Companies (MNCs) are exploiting the resources of the country to a great extent and making India poorer. It is time to think about a new strategy to restrict the over-exploitation of resources by the MNCs and promoting the companies and businesses being run by Indians. 

*Copyright © 2018 Dr. Lalit Kumar. All rights reserved. 

Why Dollar is appreciating in value

Why Dollar is appreciating in value?

By Dr. Lalit Kumar Setia |  @drlalitsetia  |  drlalitsetia@gmail.com  |  October 13, 2018 11:45 a.m. IST

How countries finance their requirements?

Let us explore the causes behind the rise in value of the Dollar. When a country requires money, there are two major sources used all around the world i.e. either impose taxes & increase user charges to fill the basket of treasuries at government level or to take debt from open market, banking companies, non-banking financial companies and lenders. In case, the country decides to raise money through open market, it is required to pay interest rate to the public or investors. More the interest rates, more the investors come ahead to finance the country. Now-a-days, the United States set the interest rates to continue rising and this is being considered as a major cause of rise in the value of Dollar. The United States is issuing bonds with higher rate of interest and in order to buy the bonds, the foreign investors require Dollars. The foreign investors buy dollars and then make payment for purchasing bonds and it rises the value of Dollar.

Demand of Currencies:

Secondly the demand of currency i.e. Dollar is rising due to the performance of an economy using it. For example, the United States’ performance attracts the investors from around the world. The more the performance, more the chances of returns or profits from the investments. The investors always seek highest yield from their investments. A strong economy is always trusted by the investors and this time due to performance of United States going up, the investors are demanding Dollars to invest in the country. The demand and supply of Dollar is fluctuating the rate of Dollar.

Role of Foreign Institutional Investors:

The Foreign institutional investors (FIIs) also affect the demand of the currencies. It depends upon the performance of the countries, returns from the investments, and potential of growth; that the FIIs be attracted. For example, during the year 2017-18, the Asia remained worst performer, it made the FIIs not to invest in Asian countries and the rupee be depreciated, which further lead to increase in current account deficit of India and other Asian countries.

Sentiments of Investors:

Thirdly the sentiments of the investors towards the improving performance of the country. The investors are constantly monitoring the decision of administration working under control of the President Donald Trump. The decisions are seemed to be autocratic but enough to generate more revenues and make the economy of United States stronger in financial terms. Due to improvement in the financial performance of United States, the investors are looking positively to the economy and investing in the companies & government of United States.

Imports and Exports of a Country:

Fourth, the imports and exports of a country. Suppose, the United States starts to export more goods and services then it will be required to pay for the goods and services coming from the United States. The payment is required to be made in Dollars. The Dollars will have to be bought first then payment will be made to the United States. The conversion of other currencies into Dollar will rise the rate of Dollar.

Speculators' intervention on bases of technical factors:

There are speculators known as traders who always intervene to gain maximum profit from the rise or fall in the value of currency. Whenever, the statistics are released by Government on various factors like Gross Domestic Product (GDP), Industries indexes, and other economic factors, if they represent a strength in the economy, the traders or speculators start buying the currency for selling it on higher rates. On the other hand, if the statistics represent a weakness in the economy, the traders or speculators start selling the currency in advance to encash their profits by buying the currency on lower rates in near future. Such interventions also benefiting the Dollar now-a-days. The panic over the investors, create a benefit to the traders or speculators.

*Copyright © 2018 Dr. Lalit Kumar. All rights reserved.